TRANSITIONAL ALLOWANCE

Tax on transitional allowance

Table of contents

How much tax do you pay on the transitional allowance. What will you keep net? Read it here.

How much tax do you pay on transition pay. What will you keep net? In the Settlement agreement a gross severance (or transition) payment is always included. The employer withholds the tax and transfers the net severance pay to the employee's account.

Transition payment or severance pay

The transitional allowance is owed by the employer if he is allowed to unilaterally dismiss the employee with the permission of the Employee Insurance Agency (UWV) or the Cantonal Court. In the case of a settlement agreement, we therefore always speak of a 'severance payment' instead of the statutory transitional allowance. In a settlement agreement, the parties may agree on a severance payment that is as high, lower or much higher than the outcome of the statutory transitionalal allowance.

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Height of tax transitional allowance

The amount of tax on the transitional allowance or severance payment depends on the amount of the total gross annual income as well as the gross severance payment. The table below shows the 2023 tax rates.

Income in 2023	Tax rate
0 – € 73.071	36,93 %
€ 73.071 and more	49,5 %

Thus, the transition or severance pay comes on top of the annual income. The employee receives the net compensation at the final settlement. The wage specification of the final settlement can be used to check which tax rate has been applied. If too much or too little tax has been withheld and remitted to the tax authorities, this will show up on the employee's income tax return.

Calculating tax on transitional allowance

It is possible to make your own calculation of how much tax you have to pay on the severance pay. In this overview, you can see how much tax in total has to be paid to the tax authorities on the annual income + transitievergoeding (or severance pay).

Suppose the income is €50,000 gross and the transition allowance is €25,000 then the total income is €75,000.

You pay 49.5% tax on (€75,000 - €73,071):	€ 1.929
49,5% tax	= € 955

You pay 39,93% tax on	€ 23.071
36,93% tax	= € 8.520

Total tax	€ 9.475

The employer will deduct €9,475 in tax from the €25,000 gross transitional allowance and remit it to the Tax Authorities.

Tax saving transitional allowance

There are several options to pay less tax on the transitional allowance or severance pay. You can choose to use (part of) the gross compensation to pay for training or course costs, for example. This ensures that no tax needs to be calculated on that part. The employer pays such costs before the (remaining) severance payment is transferred to the employee: no tax is levied on that part that has already been spent on costs.

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